What is a Value Stock
๐บ "๐๐๐ก๐ช๐ ๐๐ฉ๐ค๐๐ ๐จ ๐ค๐ช๐ฉ๐ฅ๐๐ง๐๐ค๐ง๐ข ๐๐ง๐ค๐ฌ๐ฉ๐ ๐๐ฉ๐ค๐๐ ๐จ ๐ฉ๐๐๐จ ๐ฎ๐๐๐ง" You're going to hear this on CNBC and then they will compare a value ETF $VTV with a Growth ETF $VUG and even the S&P 500 $SPX500 . But most of these stocks on the Value ETFs are not really value stocks. What is a value stock?
๐ธ A value investor is someone who understands the ๐๐๐๐๐๐ง๐๐ฃ๐๐ ๐๐๐ฉ๐ฌ๐๐๐ฃ ๐ซ๐๐ก๐ช๐ ๐๐ฃ๐ ๐ฅ๐ง๐๐๐. A business has an intrinsic value, regardless of the stock price. Value investors look for market inefficiencies, where the value of a stock is higher than the price, then they buy after taking a margin of safety.
๐ฐ The simplest way to ๐๐๐ก๐๐ช๐ก๐๐ฉ๐ ๐ฉ๐๐ ๐๐ฃ๐ฉ๐ง๐๐ฃ๐จ๐๐ ๐ซ๐๐ก๐ช๐ ๐ค๐ ๐ ๐๐ค๐ข๐ฅ๐๐ฃ๐ฎ is its liquidation value. If a stock is selling at less than its tangible book value, it is likely to be a value stock. Normally a stock selling under its tangible book value is called a deep value stock. Of course, if the stock is selling under its cash value and it doesn't have much debt it is even better. I can give the example of GameStop $GME when I started investing in it in September 2019. It was selling under its net cash value and tangible book value. In other words, you could repay all the debt and have more cash than the then market cap of the company. You could also liquidate the company, repay all liabilities and be left with more cash than you invested.
๐ข The father of Value Investing, Benjamin Graham, gives us in The Intelligent Investor, some simple metrics to know if a stock is cheap or not such as the Graham Number or the Net Current Asset Value. But I don't rely much on metrics. An example of a stock selling under its Graham Number and NCAV is Qudian $QD .
๐ฐ But the best way to find the intrinsic value of a company according to Warren Buffett is to look at the sum of the discounted owner's earnings till judgement day. This is a way to calculate ๐๐ค๐ฌ ๐ข๐ช๐๐ ๐๐๐ง๐ฃ๐๐ฃ๐๐จ ๐ฉ๐๐ ๐๐ค๐ข๐ฅ๐๐ฃ๐ฎ ๐๐๐ฃ ๐๐ฃ ๐ฉ๐๐๐ค๐ง๐ฎ ๐ง๐๐ฉ๐ช๐ง๐ฃ ๐ฉ๐ค ๐จ๐๐๐ง๐๐๐ค๐ก๐๐๐ง๐จ ๐ค๐ซ๐๐ง ๐๐ฉ๐จ ๐ก๐๐๐๐ฉ๐๐ข๐. We need to discount the future since money today has more value than money in the future.
Always make sure to take a margin of safety and to stay in your circle of competence. Don't invest in a business just because some numbers say that it is cheap.
Watch the full video on YouTube:
https://www.youtube.com/watch?v=KiSIA93-JDI&list=UUPO3uUyoXSaFWG-Ldq1mqEQ&index=1
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